Guidance Note about the Role of Independent Advisers
for the purposes of the Takeovers Code
Third Edition
August 2007
Report for the purposes of a buyback under clause 4 of class exemptions
67.
Clause 4(2)(d) of the Takeovers Code (Class Exemptions) Notice (No 2) 2001, relating o exemptions for buybacks approved by shareholders, provides, as a condition of the exemption:
Rules 18 and 19 of the Code are complied with in relation to the proposed acquisition13 (as if the references in those rules to acquisition under rule 7(c) of the Code and notice of meeting referred to in rule 15 of the Code were references to the acquisition and the notice, respectively.)
68.
Existing shareholders may increase their control percentage through a buyback undertaken by a Code company in which they do not participate ("the increasing shareholders"), either because the offer is not made to them (selective buy-back) or they opt not to accept the offer.
69.
If shareholders not associated with the increasing shareholders approve the buyback for the purposes of the Code, under clause 4 of the class exemptions the increasing shareholders may retain their resultant increased control percentages.
70.
If the non-associated shareholders do not approve the buyback for the purposes of the Code then the increasing shareholders must, within six months of increasing their control percentage, sell down their shareholdings so that their control percentages revert to pre-buyback levels (see clause 5 of the class exemptions). In the meantime those increasing shareholders cannot exercise the voting rights attached to the shares that represent the increased control percentage.
71.
The way the class exemptions are structured, the meeting of shareholders at which the buyback is approved for Code purposes will precede the making of the buyback offer to shareholders (see the Panel's determination in relation to TrustPower Limited dated 16 April 2003 (available on the Panel's website at
www.takeovers.govt.nz under "Decisions")).
72.
For the purposes of the class exemption the adviser is required to provide the non-associated shareholders with a report on the merits of the "acquisition", which in this context is the buyback by the company of its own shares, from the point of view of those shareholders voting on the acquisition. However, since this is a report for the purposes of the Code a significant issue to be discussed is the change in control percentage that is expected to occur for the increasing shareholders.
73.
A buyback is approved by the directors of the company under the Companies Act 1993 and cannot proceed unless the buyback is considered by the directors to be in the best interests of the company and its shareholders (Companies Act s63(1)(b)) and fair and reasonable to the company and it shareholders (Companies Act s63(1)(c)).
74.
A buyback may take several forms, including:
(a)
an offer in which all shareholders have the potential to participate and that is achieved through on-market transactions at then-current market prices over a period of time;
(b)
a discreet offer at a fixed price made to all shareholders; or
(c)
a discreet offer at a fixed price made to a selected group of shareholders.
75.
It may be helpful for the adviser to distinguish between:
(a)
the buyback itself, which under the Companies Act 1993 and the Exchange's Listing Rules the shareholders may not have to approve; and
(b)
the potential for an increase in the control percentage of one or more major shareholders if the acquisition (buyback) proceeds, necessitating approval of the buyback by the non-associated shareholders for the purposes of the Code.
76.
If the buyback is one for a fixed price over a short period of time, with the offer made to all shareholders, or a selected group of shareholders, off-market, the adviser may need to consider, among other matters:
(a)
The merits of the buyback transaction itself from the point of view of the shareholder as a person who will have to consider whether or not to accept the offer; and
(b)
The merits of the buyback transaction as concerns its impact on the control of the company from the point of view of the shareholder who has to decide whether or not to approve the buyback and thus allow the increasing shareholders to increase their control percentages in the target company.
77.
From the perspective of the shareholder as a recipient of the offer the issues could include, among others:
(a)
A comparison between the price being offered for each share compared with the value of each share pre-buyback offer. The likely impact on the value of shares after the buyback. Whether net tangible asset backing is a useful comparison to use. Will the NTA of the shares remaining in the company after the buyback be higher or lower than their value before the buyback?
(b)
The effect of the buyback on the liquidity of the shares. Whether the buyback provides an opportunity for the shareholders to cash-up their shareholding without impacting the market value of the shares, but possibly at the cost of reduced liquidity after the buyback (when the pool of available shares is likely to be also reduced).
(c)
The company's capacity to fund the buyback. Is this a way of utilising otherwise surplus cash? Will the company have to borrow to fund the buyback? If so, what impact might this have on debt/equity ratios?
78.
From the point of view of the shareholder as someone who has the opportunity to vote to approve or reject the Takeovers Code element of the buyback, that is to say the change in control percentage of the increasing shareholders, the issues could include, among others:
(a)
Whether this is a means by which the increasing shareholders can obtain increased control percentages without having to pay a premium for the level of control to be achieved;
(b)
The likely outcome if the shareholders vote against the proposal. For example, will the buyback still go ahead, but without the increasing shareholders being able to retain and vote their increased control percentages? What are the prospects of the increasing shareholders making a Code offer to all shareholders?
79.
If the buyback is one where shareholder consent is not required under the Companies Act or the Listing Rules, and where acquisitions can take place at market prices at any time over a future period, the issues may be slightly different. The buyback transactions will occur at prevailing market prices when the directors consider it is in the best interests of the shareholders and the company for the company to buy its own shares. There is thus no fixed reference point against which to assess value. In this case comments could cover matters, among others, such as:
(a)
A comparison between current market prices and the assessed value or net tangible asset value, if relevant. What would be the effects on the assessed value or the NTA of remaining shares if the buyback proceeds at current market value?
(b)
The benefits for shareholders if the buyback proceeds;
(c)
The likelihood of the buyback proceeding anyway if the shareholders vote against the buyback for the purposes of the Code
14;
(d)
The prospects of all shareholders being able to participate in the buyback. Not all shareholders are likely to want to take the opportunity to sell into the buyback. This will depend on which shareholders wish to sell when the company is offering to buy;
(e)
The implications for control of the company if the buyback is approved;
(f)
The options available to the increasing shareholders if the shareholders vote against the buyback. Is the shareholder able to "creep" under rule 7(e)? Might the shareholder make a full or partial takeover offer for the company?
80.
As previously, the Panel prefers that the buyback offer not be described in terms of its "fairness" or "unfairness" to the voting shareholders.
81.
In all buybacks the fundamental reason for the meeting under clause 4 of the class exemptions is for the non-associated shareholders to effectively approve (by their approval of the buyback) the increasing shareholders obtaining an increased level of control of the company. A significant issue for the report is the identification of the reasons that justify the waiving of the normal Code restrictions on increases in voting control.
Footnotes:
13
In the case of a buyback the "acquisition" referred to is the company's acquisition of its own shares
14
If this occurs the increasing shareholders would have to reduce their increased control percentage back to pre-buyback levels within six months, and could not exercise those increased voting rights in the meantime.
